TIDMRR.
RNS Number : 6975A
Rolls-Royce Holdings plc
01 October 2020
NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN WHOLE OR IN
PART, DIRECTLY OR INDIRECTLY, IN OR INTO THE UNITED STATES, NEW
ZEALAND, UNITED ARAB EMIRATES, SOUTH AFRICA OR ANY OTHER
JURISDICTION WHERE THE EXTENSION OR AVAILABILITY OF THE RIGHTS
ISSUE OR THE BOND OFFERING (AND ANY OTHER TRANSACTION CONTEMPLATED
THEREBY) WOULD BREACH ANY APPLICABLE LAW OR REGULATION.
THIS ANNOUNCEMENT IS AN ADVERTISEMENT AND DOES NOT CONSTITUTE A
PROSPECTUS OR PROSPECTUS EQUIVALENT DOCUMENT. NOTHING HEREIN SHALL
CONSTITUTE AN OFFERING OF ANY SECURITIES. NOTHING IN THIS
ANNOUNCEMENT SHOULD BE INTERPRETED AS A TERM OR CONDITION OF THE
RIGHTS ISSUE OR THE BOND OFFERING. ANY DECISION TO PURCHASE,
SUBSCRIBE FOR, OTHERWISE ACQUIRE, SELL OR OTHERWISE DISPOSE OF ANY
NIL PAID RIGHTS, FULLY PAID RIGHTS, NEW ORDINARY SHARES OR ANY
BONDS MUST BE MADE ONLY ON THE BASIS OF THE INFORMATION CONTAINED
IN AND INCORPORATED BY REFERENCE INTO THE RELEVANT PROSPECTUS OR
OFFERING MEMORANDUM ONCE PUBLISHED.
1 October 2020
ROLLS-ROYCE HOLDINGS PLC
PROPOSED RECAPITALISATION PACKAGE TO INCREASE RESILIENCE,
STRENGTHEN BALANCE SHEET AND SUPPORT LONG-TERM STRATEGY
RIGHTS ISSUE TO RAISE APPROXIMATELY GBP2 BILLION AND INTENTION
TO COMMENCE A BOND OFFERING TO RAISE AT LEAST GBP1 BILLION
COMMITMENTS AGREED FOR NEW GBP1 BILLION TWO YEAR TERM LOAN
FACILITY; SUPPORT IN PRINCIPLE FROM UK EXPORT FINANCE FOR EXTENSION
OF EXISTING 80% GUARANTEE TO BACK POTENTIAL LOAN INCREASE OF UP TO
GBP1 BILLION
Rolls-Royce Holdings plc ("Rolls-Royce" or the "Group" or the
"Company") today announces its intention to raise gross proceeds of
approximately GBP2bn by way of a fully underwritten 10 for 3 Rights
Issue. In conjunction with the Rights Issue, the Company intends to
commence, in the near future, a Bond Offering to raise gross
proceeds of at least GBP1bn. The Company has also agreed
commitments for a new two year term loan facility of GBP1bn and
received an indication of support in principle from UK Export
Finance for an extension of its 80% guarantee to support a
potential increase of the Company's existing GBP2bn five year term
loan of up to GBP1bn.
Summary
-- Proposed fully underwritten 10 for 3 Rights Issue of up to
6,436,651,043 New Ordinary Shares at 32 pence per New Ordinary
Share to raise gross proceeds of approximately GBP2bn.
-- Rights Issue Price represents a 41.4% discount to the
theoretical ex-rights price per Existing Ordinary Share by
reference to the Closing Price of 130 pence per Existing Ordinary
Share on 30 September 2020.
-- The Rights Issue is subject to approval by Shareholders at a
General Meeting expected to be held on 27 October 2020.
-- Intention to commence Bond Offering to raise gross proceeds
of at least GBP1bn, denominated in US dollars, euros and/or pounds
sterling, currently expected to be completed by settlement of the
Rights Issue subject to market conditions.
-- Commitments agreed for a new two year term loan facility of
GBP1bn, conditional upon the Rights Issue completing, the
cancellation of the GBP1.9bn Liquidity Facility and execution of a
facility agreement.
-- In addition, UK Export Finance has indicated that it would,
in principle, support an extension of its 80% guarantee of our
existing GBP2bn five year term loan to support a loan amount
increase of up to GBP1bn. This is subject to completion of the
Rights Issue, agreement of terms with lenders and approval of those
terms by UK Export Finance and HM Treasury, and there is therefore
no guarantee that this increase will take place.
-- Having considered a number of different scenarios, and in
particular a "reasonable worst case" scenario, we have determined
that it is in the best interests of Shareholders to pursue the
Rights Issue and Bond Offering now in order to:
-- Improve our liquidity headroom
-- Reduce our level of balance sheet leverage
-- Support disciplined execution and investment to ensure we
maximise value from our existing capabilities and pursue disposals
in a manner that delivers value, as we position the Group to
benefit from new technologies focused on sustainable power.
-- These steps will provide the Group with improved financial
resilience and a more appropriate balance sheet structure in order
to weather macro-economic risks before we return to strong cash
generation, expected in 2022.
-- Longer-term prospects remain strong. In Civil Aerospace, we
do not expect a similar level of investment as we move forward,
given the majority of the development of our current programmes is
complete. We expect our relatively young installed base of engines
will provide strong, annuity-style cash flows over the long term,
reflecting the long in-service lives of our products and our
services-oriented business model. We see good growth opportunities
in both Defence and Power Systems. Over the longer-term, our
capabilities leave us well positioned to capitalise on the
transition to sustainable, low-carbon power.
Warren East, Chief Executive, said "The sudden and material
effect of the COVID-19 pandemic has had a significant impact on the
commercial aviation industry, resulting in a sharp deterioration in
the financial performance of our Civil Aerospace business and, to a
lesser extent, our Power Systems business. We are undertaking
decisive and transformative action to fundamentally restructure our
operations, materially reduce our cost base and improve our
financial position. The capital raise announced today improves our
resilience to navigate the current uncertain operating environment.
By raising additional capital now, we will improve our liquidity
headroom and reduce our level of balance sheet leverage, while
supporting disciplined execution and investment to ensure we
maximise value from our existing capabilities. The strength of our
people, brand and global footprint, together with our innovation
and technology will support us as we emerge from the COVID-19
pandemic and implement our longer-term strategy, playing a crucial
role in the world's transition towards a net-zero carbon
economy."
Background to the proposed recapitalisation
We delivered strong progress in 2019 and started 2020 with real
momentum. The sudden and material effect of the COVID-19 pandemic,
however, had a significant impact on the commercial aviation
industry, resulting in a sharp deterioration in the financial
performance of our Civil Aerospace business and, to a lesser
extent, in our Power Systems business.
In our initial response to the COVID-19 outbreak, we rapidly
implemented a number of proactive safety measures, in line with
local and national guidelines, designed to ensure the safety and
wellbeing of our people. We also implemented a set of measures to
conserve cash from March 2020, which generated total pre-tax cash
savings of approximately GBP350m in the first half of 2020 and are
expected to generate approximately GBP1bn in pre-tax cash savings
in the full year ending 31 December 2020. Alongside this we took
early actions to bolster our liquidity position, securing GBP4.2bn
of additional funding.
On 20 May 2020, we also announced a major restructuring of the
Group to adjust to the new level of anticipated demand from
customers in Civil Aerospace as a result of the impact of the
COVID-19 pandemic. This restructuring, the largest in the Group's
history, is intended to deliver a total annual pre-tax cash saving
of at least GBP1.3bn by the end of 2022. We expect the
restructuring programme to result in a proposed reduction in
headcount of at least 9,000 roles. We have continued to make
further good progress on this plan, with approximately 4,800 people
having left the business by the end of August, with at least 5,000
expected by the year-end.
We believe this restructuring programme, alongside an
anticipated recovery in our end markets, will help us restore
financial performance. Our intent remains to return the Group to
positive cash flow during the second half of 2021. We are targeting
reaching at least GBP750 million FCF (excluding disposals) as early
as 2022 and we believe the longer-term prospects remain strong,
with further growth in cash flow and returns expected
thereafter.
The pathway to strong cash flow, however, remains dependent on
the timing and shape of recovery from COVID-19, notably with
regards to long-haul air travel. There is significant uncertainty
about the precise pace of this recovery and the possibility of
delays remains a risk. The Board considers it prudent to prioritise
resilience and flexibility, and is therefore pursuing the Rights
Issue and Bond Offering.
Trading update
There has been no material change in our outlook for the Group
since the 2020 Half Year Results Announcement published on 27
August 2020. As expected, revenue and underlying operating profit
for the first eight months of the year were materially below the
prior year, significantly affected by the COVID-19 pandemic and
related one-off charges taken in the first half of 2020. Consistent
with the trends in the first half, our Civil Aerospace and ITP Aero
businesses continued to see the largest impact from COVID-19;
performance in our Defence business remained resilient; and our
Power Systems business experienced disruption in some end
markets.
The Group continued to experience free cash outflows in July and
August, albeit at a reduced level compared to the first half of
2020 and modestly better than our expectations. This reflected the
ongoing management actions to control costs, large engine flying
hours slightly ahead of our "base case" forecast and some cash flow
timing benefits. We continue to expect a free cash outflow of
approximately GBP4bn in the full year ending 31 December 2020,
although uncertainties remain around the timing and shape of the
recovery in large engine flying hours and the timing of large
engine deliveries.
Prospectus
A prospectus in relation to the Rights Issue (the "Prospectus")
is expected to be published at www.rolls-royce.com/investors later
today. The preceding summary should be read in conjunction with the
full text of the following announcement, together with the
Prospectus. Unless the context otherwise requires, words and
expressions defined in the Prospectus shall have the same meanings
in this announcement.
Indicative summary timetable of principal events
Record Date for entitlements under the Close of business on
Rights Issue 23 October 2020
Deadline for proxy appointments for General 11.00 a.m. on 25 October
Meeting 2020
------------------------
General Meeting 11.00 a.m. on 27 October
2020
------------------------
Despatch of Provisional Allotment Letters 27 October 2020
(to Qualifying Non-CREST Shareholders
only)
------------------------
Existing Ordinary Shares marked "ex-rights" 8:00 a.m. on
by the London Stock Exchange 28 October 2020
------------------------
Admission of, and dealings in, Nil Paid 8:00 a.m. on
Rights commence on the London Stock Exchange 28 October 2020
------------------------
Latest time and date for acceptance, payment 11:00 a.m. on
in full and registration of renunciation 11 November 2020
of Provisional Allotment Letters
------------------------
Announcement of the results of the Rights By 8:00 a.m. on
Issue through a Regulatory Information 12 November 2020
Service
------------------------
Dealings in New Ordinary Shares, fully 8:00 a.m. on
paid, commence on the London Stock Exchange 12 November 2020
------------------------
The Rights Issue is fully underwritten with BNP Paribas,
Citigroup, Goldman Sachs, HSBC, Jefferies and Morgan Stanley acting
as Joint Global Coordinators and Crédit Agricole CIB, Santander,
SMBC Nikko and Société Générale acting as Co-lead Managers. Goldman
Sachs and Greenhill are acting as financial advisers to the
Company. Jefferies and Morgan Stanley are acting as joint sponsors
to the Company.
This announcement has been determined to contain inside
information.
LEI: 213800EC7997ZBLZJH69
A conference call will be held at 08:30 (BST) today and details
of how to join can be accessed at www.rolls-royce.com/investors ,
along with materials relating to the call.
For further information, please contact:
Rolls-Royce Holdings plc Media
Richard Wray
Director of External Communications
& Brand, Rolls-Royce Holdings
plc
Tel +44 (0) 7810 850055
Richard.Wray@rolls-royce.com
Investors
Isabel Green
Head of Investor Relations
Rolls-Royce Holdings plc
Tel +44 (0) 7880 160976
Isabel.Green@rolls-royce.com
Brunswick Group Charles Pretzlik
Tel +44 7823 527191
cpretzlik@brunswickgroup.com
Caroline Daniel
Tel +44 7785 962682
cdaniel@brunswickgroup.com
Pip Green
Tel +44 7834 502589
pgreen@brunswickgroup.com
-------------------------------------
About Rolls-Royce Holdings plc
1. Rolls-Royce pioneers cutting-edge technologies that deliver
clean, safe and competitive solutions to meet our planet's vital
power needs.
2. Rolls-Royce has customers in more than 150 countries,
comprising more than 400 airlines and leasing customers, 160 armed
forces, 70 navies, and more than 5,000 power and nuclear
customers.
3. Annual underlying revenue was GBP15.45 billion in 2019,
around half of which came from the provision of aftermarket
services.
4. In 2019, Rolls-Royce invested GBP1.46 billion on research and
development. We also support a global network of 29 University
Technology Centres, which position Rolls-Royce engineers at the
forefront of scientific research.
IMPORTANT NOTICES
This announcement has been issued by and is the sole
responsibility of the Company. The information contained in this
announcement is for background purposes only and does not purport
to be full or complete. No reliance may or should be placed by any
person for any purpose whatsoever on the information contained in
this announcement or on its accuracy or completeness. The
information in this announcement is subject to change without
notice.
This announcement is not a prospectus (or a prospectus
equivalent document) but an advertisement. Neither this
announcement nor anything contained in it shall form the basis of,
or be relied upon in conjunction with, any offer or commitment
whatsoever in any jurisdiction. Investors should not acquire any
Nil Paid Rights, Fully Paid Rights, New Ordinary Shares or any
Bonds except on the basis of the information contained in the
Prospectus or offering memorandum, as applicable.
A copy of the Prospectus will, following publication, be
available on the Company's website, www.rolls-royce.com/investors .
Neither the content of the Company's website nor any website
accessible by hyperlinks on the Company's website is incorporated
in, or forms part of, this announcement. The Prospectus will
provide further details of the New Ordinary Shares, the Nil Paid
Rights and the Fully Paid Rights being offered pursuant to the
Rights Issue or an offering memorandum will be available to
qualifying institutional investors following
commencement of the Bond Offering.
This announcement does not contain or constitute an offer for
sale or the solicitation of an offer to purchase or subscribe for
securities in the United States or any other state or jurisdiction
in which such release, publication or distribution would be
unlawful. The Nil Paid Rights, the Fully Paid Rights, the New
Ordinary Shares and the Bonds have not been and will not be
registered under the US Securities Act of 1933, as amended (the
"Securities Act") or under any securities laws of any state or
other jurisdiction of the United States and may not be offered,
sold, pledged, taken up, exercised, resold, renounced, transferred
or delivered, directly or indirectly, in or into the United States
except pursuant to an applicable exemption from, or in a
transaction not subject to, the registration requirements of the
Securities Act and in compliance with any applicable securities
laws of any state or other jurisdiction of the United States or
other jurisdiction. There will be no public offer of the Nil Paid
Rights, the Fully Paid Rights, the New Ordinary Shares or any of
the Bonds in the United States. Subject to certain limited
exceptions, Provisional Allotment Letters have not been, and will
not be, sent to, and Nil Paid Rights have not been, and will not
be, credited to the CREST account of, any Qualifying Shareholder
with a registered address in or that is located in the United
States. None of the New Ordinary Shares, the Nil Paid Rights, the
Fully Paid Rights or the Provisional Allotment Letters, this
announcement or any other document connected with the Rights Issue
or the Bond Offering has been or will be approved or disapproved by
the United States Securities and Exchange Commission or by the
securities commissions of any state or other jurisdiction of the
United States or any other regulatory authority, nor have any of
the foregoing authorities passed upon or endorsed the merits of the
offering of the New Ordinary Shares, the Nil Paid Rights, the Fully
Paid Rights or any of the Bonds, or the accuracy or adequacy of the
Provisional Allotment Letters, this announcement or any other
document connected with the Rights Issue or the Bond Offering. Any
representation to the contrary is a criminal offence in the United
States.
This announcement is for information purposes only and is not
intended to and does not constitute or form part of any offer or
invitation to purchase or subscribe for, or any solicitation to
purchase or subscribe for, Nil Paid Rights, Fully Paid Rights, New
Ordinary Shares or any of the Bonds or to take up any entitlements
to Nil Paid Rights in any jurisdiction. No offer or invitation to
purchase or subscribe for, or any solicitation to purchase or
subscribe for, Nil Paid Rights, Fully Paid Rights, New Ordinary
Shares or any of the Bonds or to take up any entitlements to Nil
Paid Rights will be made in any jurisdiction in which such an offer
or solicitation is unlawful.
The information contained in this announcement, the Prospectus
and the Provisional Allotment Letters is not for release,
publication or distribution to persons in the United States, New
Zealand, United Arab Emirates, South Africa or any other
jurisdiction where the extension or availability of the Rights
Issue or the Bond Offering (and any other transaction contemplated
thereby) would breach any applicable law or regulation, and,
subject to certain exceptions, should not be distributed, forwarded
to or transmitted in or into any jurisdiction, where to do so might
constitute a violation of local securities laws or regulations.
The distribution of this announcement, the Prospectus, the
Provisional Allotment Letter and the offering or transfer of Nil
Paid Rights, Fully Paid Rights or New Ordinary Shares into
jurisdictions other than the United Kingdom may be restricted by
law, and, therefore, persons into whose possession this
announcement, the Prospectus, the Provisional Allotment Letter
and/or any accompanying documents comes should inform themselves
about and observe any such restrictions. Any failure to comply with
any such restrictions may constitute a violation of the securities
laws of such jurisdiction. In particular, subject to certain
exceptions, this announcement, the Prospectus (once published) and
the Provisional Allotment Letters (once printed) should not be
distributed, forwarded to or transmitted in or into the United
States, New Zealand, United Arab Emirates South Africa or any other
jurisdiction where the extension or availability of the Rights
Issue or the Bond Offering (and any other transaction contemplated
thereby) would breach any applicable law or regulation. Recipients
of this announcement should conduct their own investigation,
evaluation and analysis of the business, data and property
described in this announcement and/or if and when published the
Prospectus to be published by the Company in connection with the
Rights Issue.
This announcement does not constitute a recommendation
concerning any investor's options with respect to the Rights Issue
or the Bond Offering. The price and value of securities can go down
as well as up. Past performance is not a guide to future
performance. The contents of this announcement are not to be
construed as legal, business, financial or tax advice. Each
shareholder or prospective investor should consult his, her or its
own legal adviser, business adviser, financial adviser or tax
adviser for legal, financial, business or tax advice.
NOTICE TO ALL INVESTORS
BNP Paribas ("BNP Paribas"), Citigroup Global Markets Limited
("Citigroup"), Goldman Sachs International ("Goldman Sachs"), HSBC
Bank plc ("HSBC"), Jefferies International Limited ("Jefferies"),
Morgan Stanley & Co. International plc ("Morgan Stanley"),
Crédit Agricole Corporate and Investment Bank ("Crédit Agricole
CIB"), Banco Santander, S.A. ("Santander"), SMBC Nikko Capital
Markets Limited ("SMBC Nikko") and Société Générale ("Société
Générale", and, together with Goldman Sachs , Morgan Stanley, BNP
Paribas, Citigroup, HSBC, Jefferies, Crédit Agricole CIB, Santander
and SMBC Nikko, the "Banks") are authorised in the United Kingdom
by the Financial Conduct Authority and regulated by the Financial
Conduct Authority and, in the case of BNP Paribas, lead supervised
by the European Central Bank ("ECB") and the Autorité de Contrôle
Prudentiel et de Résolution ("ACPR") (and its London Branch is
authorised by the ECB, the ACPR and the Prudential Regulation
Authority and subject to limited regulation by the Financial
Conduct Authority and the Prudential Regulation Authority). Each of
the Banks is acting exclusively for Rolls-Royce Holdings plc in
relation to the Rights Issue and no other person in connection with
the Rights Issue and will not be responsible to anyone other than
Rolls-Royce Holdings plc for providing the protections afforded to
their respective clients nor for providing advice to any person in
relation to the Rights Issue or any matters referred to in this
announcement. Goldman Sachs is acting as Financial Adviser to the
Company and no other person in connection with this announcement
and will not be responsible to anyone other than the Company for
providing the protections afforded to clients of Goldman Sachs nor
for providing advice to any person in relation to any matters
referred to in this announcement.
None of the Banks, nor any of their respective subsidiaries,
branches or affiliates, nor any of their respective directors,
officers or employees owes or accepts any duty, liability or
responsibility whatsoever (whether direct or indirect, whether in
contract, in tort, under statute or otherwise) to any person who is
not a client of the Banks in connection with the Rights Issue, this
announcement, any statement contained herein, or otherwise.
No representation or warranty, express or implied, is or will be
made as to, or in relation to, and no responsibility or liability
is or will be accepted by the Banks, nor any of their respective
subsidiaries, branches, affiliates or agents as to, or in relation
to, the accuracy or completeness of this announcement or any other
information made available to or publicly available to any
interested party or its advisers, whether written, oral or in a
visual or electronic form, and howsoever transmitted or made
available, and any liability therefore is expressly disclaimed.
In connection with the Rights Issue, the Banks and any of their
respective affiliates, may in accordance with applicable legal and
regulatory provisions, engage in transactions in relation to the
Nil Paid Rights, the Fully Paid Rights, the New Ordinary Shares
and/or related instruments for their own account provided that the
Banks and their respective affiliates may not engage in short
selling for the purpose of hedging their commitments under the
Underwriting Agreement (subject to certain exceptions in the
Underwriting Agreement). Accordingly, references in the Prospectus
to the Nil Paid Rights, Fully Paid Rights or New Ordinary Shares
being issued, offered, subscribed, acquired, placed or otherwise
dealt in should be read as including any issue or offer to, or
subscription, acquisition, placing or dealing by, the Banks and any
of their affiliates acting in such capacity.
The Banks and their respective affiliates may enter into
financing arrangements with investors in connection with which the
Banks and any of their affiliates may from time to time acquire,
hold or dispose of New Ordinary Shares. In addition, the Banks may
also co-ordinate a sell-down in the event that any underwriting
crystallises as a result of the Rights Issue. The Banks and their
respective affiliates do not intend to disclose the extent of any
such investment or transactions otherwise than in accordance with
any legal or regulatory obligations to do so.
In the event that the Banks acquire New Shares that are not
taken up by Qualifying Shareholders, the Banks and their respective
affiliates may co-ordinate disposals of such shares in accordance
with applicable law and regulation. The Banks and their respective
affiliates do not propose to make any public disclosure in relation
to such transactions.
Greenhill & Co. International LLP ("Greenhill") is
authorised by the Financial Conduct Authority and regulated by the
Financial Conduct Authority and is acting exclusively as financial
adviser to the Company and no one else in connection with the
matters described in this announcement and will not be responsible
to anyone other than the Company for providing the protections
afforded to clients of Greenhill nor for providing advice in
connection with the matters referred to herein. Neither Greenhill
nor any of its subsidiaries, branches or affiliates, nor any of its
directors, officers or employees owes or accepts any duty,
liability or responsibility whatsoever (whether direct or indirect,
whether in contract, in tort, under statute or otherwise) to any
person who is not a client of Greenhill in connection with the
Rights Issue, this announcement, any statement contained herein, or
otherwise.
INFORMATION TO DISTRIBUTORS
Solely for the purposes of the product governance requirements
contained within: (a) EU Directive 2014/65/EU on markets in
financial instruments, as amended ("MiFID II"); (b) Articles 9 and
10 of Commission Delegated Directive (EU) 2017/593 supplementing
MiFID II; and (c) local implementing measures (together, the "MiFID
II Product Governance Requirements"), and disclaiming all and any
liability, whether arising in tort, contract or otherwise, which
any "manufacturer" (for the purposes of the MiFID II Product
Governance Requirements) may otherwise have with respect thereto,
the Nil Paid Rights, the Fully Paid Rights and the New Ordinary
Shares have been subject to a product approval process, which has
determined that they each are: (i) compatible with an end target
market of retail investors and investors who meet the criteria of
professional clients and eligible counterparties, each as defined
in MiFID II; and (ii) eligible for distribution through all
distribution channels as are permitted by MiFID II (the "Target
Market Assessment").
Notwithstanding the Target Market Assessment, Distributors
should note that: the price of the Nil Paid Rights, the Fully Paid
Rights and/or the New Ordinary Shares may decline and investors
could lose all or part of their investment; the Nil Paid Rights,
the Fully Paid Rights and the New Ordinary Shares offer no
guaranteed income and no capital protection; and an investment in
the Nil Paid Rights, the Fully Paid Rights and/or the New Ordinary
Shares is compatible only with investors who do not need a
guaranteed income or capital protection, who (either alone or in
conjunction with an appropriate financial or other adviser) are
capable of evaluating the merits and risks of such an investment
and who have sufficient resources to be able to bear any losses
that may result therefrom. The Target Market Assessment is without
prejudice to the requirements of any contractual, legal or
regulatory selling restrictions in relation to the offer.
Furthermore, it is noted that, notwithstanding the Target Market
Assessment, the Banks will only procure investors who meet the
criteria of professional clients and eligible counterparties. For
the avoidance of doubt, the Target Market Assessment does not
constitute: (a) an assessment of suitability or appropriateness for
the purposes of MiFID II; or (b) a recommendation to any investor
or group of investors to invest in, or purchase, or take any other
action whatsoever with respect to the Nil Paid Rights, the Fully
Paid Rights and/or the New Ordinary Shares. Each distributor is
responsible for undertaking its own target market assessment in
respect of the Nil Paid Rights, the Fully Paid Rights and/or the
New Ordinary Shares and determining appropriate distribution
channels.
FORWARD-LOOKING STATEMENTS
This announcement may contain projections and other
forward-looking statements. The words "believe", "expect",
"anticipate", "intend" and "plan" and similar expressions identify
forward-looking statements. All statements other than statements of
historical facts included in this announcement, including, without
limitation, those regarding the Company's financial position,
potential business strategy, potential plans and potential
objectives, are forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties and other
factors, which may cause the Company's actual results, performance
or achievements to be materially different from any future results,
performance or achievements expressed or implied by such
forward-looking statements. Such forward-looking statements are
based on numerous assumptions regarding the Company's present and
future business strategies and the environment in which the Company
will operate in the future. Further, certain forward-looking
statements are based upon assumptions of future events which may
not prove to be accurate.
None of the Company, its officers, advisers or any other person
gives any representation, assurance or guarantee that the
occurrence of the events expressed or implied in any
forward-looking statements in this announcement will actually
occur, in part or in whole.
The forward-looking statements in this announcement speak only
as at the date of this announcement. To the extent required by
applicable law or regulation (including as may be required by the
Companies Act, the Prospectus Regulation Rules, the Listing Rules,
MAR, the Disclosure Guidance and Transparency Rules and FSMA), the
Company will update or revise the information in this announcement.
Otherwise, the Company assumes no obligation to update or provide
any additional information in relation to such forward-looking
statements. Additionally, statements of the intentions or beliefs
of the board of directors of the Company reflect the present
intentions and beliefs of the board of directors of the Company as
at the date of this announcement and may be subject to change as
the composition of the board of directors of the Company alters, or
as circumstances require.
Nothing in this announcement is intended as a profit forecast or
estimate for any period and no statement in this announcement
should be interpreted to mean that earnings or earnings per share
or dividend per share for the Company for the current or future
financial years would necessarily match or exceed the historical
published earnings or earnings per share or dividend per share for
the Company.
BACKGROUND TO AND REASONS FOR THE RIGHTS ISSUE
Context
We are a leading global power technology company, with a
portfolio spanning our Civil Aerospace (which contributed 51% of
the underlying revenue generated by the Group's businesses in
2019), Power Systems (22%), Defence (20%) and ITP Aero (6%)
businesses. The breadth of our business activities provides the
Group with access to a wide range of growth opportunities. This,
together with our large installed base of engines and the
significant performance improvement we expect to deliver in the
Civil Aerospace business over the coming years, will drive enhanced
value for our stakeholders.
The period prior to the COVID-19 pandemic
Between 2015 and 2019 we delivered substantially improved
financial performance, while simultaneously investing heavily in
new civil aerospace engine programmes and addressing the in-service
issues on the Trent 1000 programme. During this period:
-- widebody engine deliveries increased by 66%;
-- EFHs for the Group's engines increased by 43%;
-- the Civil Aerospace business's installed large engine fleet
increased by 29% to 5,000 engines;
-- the Power Systems business's operating profit margins
improved by two percentage points and its underlying revenue
compound annual growth rate was 10%; and
-- FCF increased to GBP873m (from GBP179m), despite incurring
GBP405m of in-service cash costs relating to the Trent 1000
programme in 2019 affecting FCF.
Additionally, we worked to improve the strength of our balance
sheet during this period, raising around GBP1bn through the
disposals of Commercial Marine and L'Orange. Together with the
higher FCF generation outlined above, the Group's net debt position
improved from GBP111m in 2015 to a net cash position of GBP1.4bn
(both excluding lease liabilities) as at 31 December 2019.
Our results published for the year ended 31 December 2019
continued to demonstrate good progress in a number of areas,
including:
-- strong progress in growing underlying operating profit (with
growth of 25% year-on-year to GBP808m) and FCF with growth of 54%
year-on-year;
-- a record number of widebody engines delivered in 2019;
-- a 14% reduction in OE unit losses;
-- a 64% market share of new widebody engine orders;
-- a 5% organic increase year-on-year in business aviation OE sales;
-- a record order intake in our Defence business, amounting to 1.6x underlying revenue for 2019;
-- an improvement in underlying operating margin of our Power
Systems business of nearly one percentage point (10.1% in 2019
compared to 9.2% in 2018);
-- the fixes to address the Trent 1000 durability issues. We
have since brought the number of customer aircraft on the ground as
a result of these issues down to zero as at 30 June 2020; and
-- significant progress on our previous restructuring programme,
including the simplification of processes and delivery of a more
agile working culture, which resulted in run-rate savings of
GBP269m as at 31 December 2019.
We believe that, prior to the COVID-19 pandemic, we were on
track to deliver on our 2020 target of GBP1bn of FCF with continued
growth towards our medium-term ambition of exceeding GBP1 of FCF
per Ordinary Share (which translated into at least GBP1.9bn of
FCF).
Further progress was still being pursued to increase cost
competitiveness and improve consistency of operational and
financial performance. We believe we were well positioned to
deliver materially stronger shareholder returns over time and, in
parallel, to invest in new technologies to address a range of
market opportunities in each of our businesses.
The impact of the COVID-19 pandemic
The COVID-19 pandemic has resulted in wide-ranging measures
being implemented across the world in an attempt to contain the
spread of the virus. This has had a significant effect on the
Group. The commercial aerospace sector in which our Civil Aerospace
and ITP Aero businesses operate has been particularly affected:
-- much of the global airline fleet has been temporarily
grounded, resulting in a fall in global airline demand (as measured
by revenue passenger kilometres ("RPKs")) by 94%, 91%, 87% and 80%
in April, May, June and July 2020 respectively compared to the same
period in 2019 (according to IATA); and
-- airlines have delayed or cancelled planned deliveries and
orders for new aircraft, with Airbus and Boeing responding with
significant reductions in production rates of the widebody aircraft
for which we supply engines.
Our Civil Aerospace business derives the majority of its cash
flow from payments based on the number of hours that our engines
are powering our customers' aircraft. In 2019, our large engine
fleet generated approximately GBP4.0bn of gross cash inflow. In
addition, approximately GBP2.7bn of gross cash inflow was derived
from the delivery of widebody engines. As a result of the COVID-19
pandemic, large engine deliveries and flying hours were both down
approximately 50% in the first half of 2020. We saw a 37% reduction
year-on-year in underlying revenue in our Civil Aerospace business
in the six-month period ended 30 June 2020, with an underlying
operating loss of GBP1.8bn. However, business jets and regional
aircraft flying hours proved to be more resilient.
Reflecting the changed market outlook, we expect lower US dollar
receipts over the next seven years and, as a result, we took the
decision to reduce the size of our hedge book by $10.3bn. This
resulted in a GBP1.46bn underlying finance charge in the first half
of 2020. Additionally, as net purchasers of US dollars in this
period, we were unable to utilise our hedge book over the six-month
period to 30 June 2020.
The commercial aerospace activities of our ITP Aero business,
which accounted for approximately 77% of its underlying revenues in
2019, have experienced a similar deterioration in end market
demand.
Our Defence business has remained resilient. It experienced no
material operational or financial disruption. Underlying revenue in
the six-month period ended 30 June 2020 increased by 4%
year-on-year with operating profit increasing by 19% on an organic
basis and an order intake to underlying revenue ratio of 0.8x in
that period.
Our Power Systems business has experienced varying levels of
COVID-19-related disruption and utilisation, with our customers in
industrial markets most affected by lower activity levels. Naval
and governmental end market demand has remained robust. As a
result, we saw an 11% reduction in underlying revenue with an
underlying operating profit down by 79% and a 27% reduction
year-on-year in orders in the six-month period ended 30 June
2020.
We have implemented a number of cost reduction actions to
mitigate the effect of the COVID-19 pandemic, which are described
below. However, these have not been sufficient to offset the total
negative cash impact across the Group. In the six-month period
ended 30 June 2020, we therefore reported an underlying operating
loss in the period of GBP1.7bn and negative FCF of GBP2.8bn.
Recent trends in EFHs for the Civil Aerospace business have
shown some early signs of recovery from their April low points, led
by an increase in flight activity in China, Asia Pacific and the
Middle East. However, uncertainty remains regarding the overall
shape and timing of any recovery.
In our initial response to the COVID-19 outbreak, we rapidly
implemented a number of proactive safety measures, in line with
local and national guidelines, designed to ensure the safety and
wellbeing of our people. At the same time, we are proud to have
supported the communities in which we operate in a variety of ways,
including forming an alliance of leading companies seeking to use
data analytics to provide insights to support government decision
making in response to the COVID-19 pandemic.
In relation to our financial position, we implemented a set of
measures to conserve cash from March 2020, including:
-- a reduction of capital expenditure on non-critical programmes
by around one third compared to our initial expectations for 2020
and cancellation of capacity expansion projects that are no longer
required;
-- a significant reduction in spend on consulting, professional
fees and subcontractors, together with a material reduction in
travel expenditure;
-- a review of R&D and engineering expenditure, which led to
expenditure reductions reflecting a re-phasing of certain
programmes, such as UltraFan, over a longer period of time; and
-- an approximately 10% reduction in our global salary costs,
largely achieved through temporary pay cuts for senior management,
use of government furlough schemes and pay deferrals for staff.
These mitigating actions generated total cash savings of
approximately GBP350m in the first half of 2020 and are expected to
generate approximately GBP1bn in pre-tax cash savings in the full
year ending 31 December 2020. In addition to these cash savings, we
also moved quickly to reduce direct purchase volumes, as well as
cancelling our final 2019 shareholder payment to preserve an
additional GBP137m of cash in 2020. As announced in our 2020 Half
Year Results Announcement, no interim shareholder payment was
proposed for 2020.
Alongside this, we took early actions to bolster our liquidity
position, allowing us time to conduct a more detailed review of the
Group's capital structure and funding options. These actions
included:
-- entering into an additional GBP1.9bn Liquidity Facility with
a maturity date in October 2021 (which is currently undrawn and
will be cancelled on completion of the Rights Issue);
-- issuing GBP300m of commercial paper through the UK
Government's CCFF with a maturity date of 17 March 2021; and
-- entering into a GBP2bn five year Term Loan Facility, which is
supported by an 80% guarantee from UK Export Finance.
On 20 May 2020, we also announced a major restructuring of the
Group to adjust to the new level of anticipated demand from
customers in certain of our end markets as a result of the impact
of the COVID-19 pandemic and to seek to restore our financial
performance.
Further actions to enhance our financial resilience and deliver
a more appropriate balance sheet to position us for the
post-COVID-19 environment
In response to the impact of the COVID-19 pandemic, the Board
has conducted a detailed review of the Group's outlook, balance
sheet and funding options. As a result of this, we are undertaking
decisive and transformative action to fundamentally restructure the
Group's operations, materially reduce our cost base by at least
GBP1.3bn by the end of 2022 and improve our financial position. We
have conducted a detailed review of the Group's capital structure
and funding options, considering a number of different scenarios
and assessing their potential impact on the Group's financial
position. This included consideration of a "reasonable worst case"
scenario, further details of which are set out in section 12
(Working Capital) of Part XII (Additional Information) of the
Prospectus.
Taking into account, in particular, this "reasonable worst case"
scenario, alongside continued global and macro-economic
uncertainty, we have determined that it is in the best interests of
Shareholders to take the following actions:
-- to deliver a number of potential disposals (which include the
ITP Aero business) to raise gross proceeds of more than GBP2bn, as
announced in our 2020 Half Year Results Announcement;
-- to raise additional capital of approximately GBP2bn through
the Rights Issue and at least GBP1bn by way of a Bond Offering;
and
-- to agree commitments for a new term loan facility of GBP1bn,
which is subject to conditions including completion of the Rights
Issue (and the resulting cancellation of the Liquidity Facility)
and agreement and execution of a facility agreement. This new term
loan would have a final maturity date falling two years from entry
into a facility agreement.
In addition, UK Export Finance has indicated that it would, in
principle, support an extension of its 80% guarantee of our
existing GBP2bn five year term loan to support an increase in the
loan amount of up to GBP1bn. This is subject to completion of the
Rights Issue, agreement of terms with lenders and approval of those
terms by UK Export Finance and HM Treasury, and there is therefore
no guarantee that this increase will take place.
By raising additional capital now, we will improve our liquidity
headroom, reduce our level of balance sheet leverage while
supporting disciplined execution and investment to ensure we
maximise value from our existing capabilities. It will also allow
us to deliver disposals in a manner that ensures value for our
shareholders as we position the Group for the long term to benefit
from new technologies focused on sustainable power. We believe
these steps will provide the Group with improved financial
resilience and a more appropriate balance sheet structure across
2021 in order to weather the macro-economic risks before we return
to strong cash generation, which is expected in 2022.
We are also focused on ensuring we maintain a suitable capital
structure for the markets in which we operate and believe that an
investment grade credit rating is appropriate for our business. We
have an ambition to return to a net cash position in the base case
over the next few years and to secure an investment grade credit
rating in the medium term.
We believe execution of this strategy will ultimately provide a
strong platform to drive a significant improvement in FCF and
deliver attractive shareholder returns. If we do not successfully
execute the Rights Issue, the Bond Offering or one or more of the
targeted disposals in the required timescales or if the impact of
the COVID-19 pandemic is more severe than we expect, even in a
"reasonable worst case" scenario, we will need to consider whether
it is appropriate to pursue certain of the alternative actions
outlined in section 12 (Importance of vote) of Part V (Letter from
the Chairman of Rolls-Royce Holdings plc) of the Prospectus.
OUR STRENGTHS
We believe that the strengths summarised below, together with
key enablers, such as the strength of the Rolls-Royce brand, our
people and our global footprint, will play an important role as we
emerge from the COVID-19 pandemic and implement our longer-term
strategy.
Our products incorporate cutting-edge technologies. We have a
track record of developing commercially successful new
technologies
Our products incorporate significant intellectual property,
capturing cutting-edge technologies that have been developed over
decades. In our Civil Aerospace and ITP Aero businesses, commercial
aero engines are extremely complex mechanical engineering products,
requiring significant expertise in aerodynamic, thermodynamic and
materials technologies. Similarly, in our Defence business, we are
one of only a handful of companies currently capable of designing,
integrating and manufacturing complete military jet engines, mainly
for the UK and US governments. In our Power Systems business, we
have focused on demanding, high-end applications for reciprocating
engines, in areas such as mission critical back-up power where
start-up time and reliability are critical. We also have
significant expertise in powerplants for nuclear-powered submarine
applications. We have a long-established track record of developing
commercially successful technology and products, which have enabled
us to grow our share in key markets.
We focus on developing integrated power system solutions
We integrate individual enabling technologies into complete
systems and power solutions. This provides our customers with the
ability to work with a single partner to provide their entire power
needs for their chosen application. In our Civil Aerospace and
Defence businesses, our capabilities cover end-to-end design,
assembly and through-life support of complete gas turbine power
solutions. Our Power Systems business is increasingly moving into
the provision of complete power generation systems such as power
'gensets' as well as integrated propulsion systems for the rail and
marine markets.
Our products provide an attractive aftermarket opportunity
Many of our products have significant aftermarket and
maintenance requirements during their operating lives, which
typically run for decades. We provide complete through-life
maintenance and support for our power solutions, including
extensive use of "power-by-the-hour" LTSAs, as well as more
traditional time and materials business. In 2019, 52% of our
underlying revenue was generated from aftermarket services.
Accordingly, we believe our substantial installed base provides a
large, captive, visible, and long-term revenue and cash flow
stream. The Civil Aerospace business installed base is relatively
young, with approximately 9,000 small and business aviation engines
in service with an average age of 19 years for small civil jets and
13 years for business jets, as well as approximately 5,000 large
engines with an average age of less than 9 years. Given an average
expected engine life of approximately 40 years for a small or
business aviation engine and approximately 25 years for a widebody
engine, we expect significant aftermarket revenue and value from
this installed base. Similarly, the installed base in our Defence
business of approximately 16,000 defence engines is expected to
continue to operate for many decades.
We enjoy strong customer relationships
We believe our focus on building complete power solutions
provides the basis for strong customer relationships, with the
Group acting as a single, trusted power provider for the customer.
The LTSA model for through-life support further deepens these
relationships. We have built strong, direct customer relationships
with major aircraft manufacturers, such as Airbus, Boeing,
Gulfstream and Lockheed Martin, and with more than 400 airlines and
leasing customers, 160 armed forces, 70 naval forces and more than
5,000 power and nuclear customers. Globally, our largest defence
customers are the US Department of Defense and the UK Ministry of
Defence. These relationships have allowed the Group to continue
winning business during a period of increased macro-economic
uncertainty associated with the COVID-19 pandemic.
We have a successful track record of partnerships globally
We have a long track record of working with external partners
spanning corporations, governments and universities in order to
leverage outside expertise, market access, and capital. The Civil
Aerospace business makes extensive use of RRSPs to outsource
components or complete engine modules to trusted suppliers, forming
closer relationships and aligning the incentives of suppliers to
the overall programme ambitions. In our Defence business, we act as
a major partner on key European defence collaborations and are an
important member of the Team Tempest fighter jet consortium. In our
Power Systems business, we have significantly accelerated
partnering efforts in recent years, including launching joint
ventures for engine assembly in both India and China.
OUR STRATEGY
As explained above, we are undertaking a number of
transformative actions in light of the impact of the COVID-19
pandemic and have refined our strategy accordingly.
Our strategy is to:
-- restore financial performance in order to improve returns and
build a more resilient and more appropriate balance sheet;
-- drive growth and maximise value from our existing capabilities; and
-- position the Group to benefit from new technologies, with a focus on sustainable power.
We believe that the key end markets for our businesses remain
fundamentally attractive. Our Civil Aerospace business benefits
from a sizeable and young installed base generating a significant
long-term aftermarket annuity stream. The civil aerospace industry
is expected to deliver long-term growth, albeit from a lower base,
as GDP recovers and an increasing proportion of the world's
population travels. The industry has experienced a number of shocks
in the past - including the events of 11 September 2001 and the
global financial crisis - and it has undergone a process of
recovery each time.
While spending on the products manufactured and services
provided by our Defence business may come under some pressure in
the near term given fiscal spending priorities, we believe that
governments will continue to invest in maintaining and upgrading
their defence capabilities.
Finally, the range of end markets served by our Power Systems
business is expected to experience cyclical recovery, including
strong structural growth in mission critical power supply.
We further believe that over the longer term, the end markets in
which we operate will see growing demand for cleaner and, more
sustainable power, electrification and digitalisation. We will be
well-positioned to play a crucial role in the world's transition
towards a net-zero carbon economy.
We believe that the strengths described above and the execution
of our strategy will allow us to capitalise on this, ultimately
driving a significant improvement in FCF and delivering attractive
shareholder returns.
Restoring financial performance in order to improve returns and
build a more resilient and more appropriate balance sheet
Given the current significant uncertainty, we are today
announcing the Rights Issue and the Bond Offering alongside the
potential additional term loans described above and the targeted
disposals announced as part of our 2020 Half Year Results
Announcement on 27 August 2020. We believe these measures will
build a more resilient and more appropriate balance sheet and
provide additional liquidity headroom to navigate through the
COVID-19 recovery. We have launched a major restructuring
programme, the largest in the Group's history, that will re-size
the cost base and capital requirements of our Civil Aerospace
business and increase cost efficiency. We intend to retain a strong
set of capabilities and technologies following completion of this
programme, allowing us to benefit from the strong fundamentals of
our businesses.
We believe this restructuring programme, alongside an
anticipated recovery in our end markets, greater discipline in
R&D expenditure and the absence of certain one-off cash
outflows expected to be incurred this year, will help us restore
financial performance and return to FCF of at least GBP750m
(excluding disposals) as early as 2022.
In response to the lower-demand environment in the civil
aerospace market over the medium term, we are taking decisive
actions to:
-- re-size the manufacturing footprint of the Civil Aerospace
business: we are significantly reducing the scale and, therefore,
fixed costs of our manufacturing footprint. This includes a
proposed reduction of the headcount in the Civil Aerospace business
by approximately one third (around 8,000 roles) (subject, where
applicable, to consultation) as well as a major manufacturing
footprint consolidation. As part of this consolidation we intend to
reduce the number of global sites involved in widebody engine
assembly and test from three to just one (in Derby) as well as
consolidating fan blade, turbine blade and blisk production
activities;
-- optimise our MRO capabilities: we will maintain core in-house
capability at a reduced number of locations to reduce our capital
intensity, while supporting longer-term growth in maintenance
demand primarily through an enlarged external MRO supplier
network;
-- implement a capital-light spare engine strategy: the Group
typically commits approximately GBP100m-GBP150m each year of its
own capital to spare engines, to support customers who pay for
spare engine coverage under the Group's LTSAs. We intend to pursue
third-party partnerships to reduce this capital intensity and
increase flexibility of spare engine provision; and
-- reduce central functions: by the end of 2021, it is proposed
that central functions headcount will be reduced by approximately
20%-25% (subject, where applicable, to consultation) to match a
leaner Group structure.
This programme is intended to deliver larger, permanent savings
to replace and expand on the temporary mitigating actions delivered
by the Group in 2020. We anticipate a resulting total annual
pre-tax cash saving of at least GBP1.3bn to be achieved by the end
of 2022. The restructuring is expected to result in cash
restructuring costs of approximately GBP800m, phased as
approximately GBP400m in 2020, GBP300m in 2021 and GBP100m in
2022.
We expect the restructuring programme to result in a proposed
reduction in headcount of at least 9,000 roles (subject, where
applicable, to consultation) from a global workforce of 52,000,
with around 8,000 of these proposed headcount reductions in our
Civil Aerospace business. Headcount reductions of approximately
4,800 had taken place at the end of August, with at least 5,000
expected by the year-end. The scope of this exercise has already
been determined, with specific implementation plans formed and
subject to consultation currently underway with trade unions. We
deeply regret the need to take these difficult decisions and steps,
particularly as we consider the impact on employees directly
affected by this restructuring. The Group has therefore sought
voluntary severance where possible, in order to mitigate the need
for compulsory redundancy, as well as putting in place a suite of
measures to help employees as they transition out of the Group.
There have been more than 2,500 voluntary severance and early
retirement agreements in the UK, substantially reducing the need
for compulsory redundancies.
In addition, within our Power Systems business, as a response to
changes in global demand, the business is working actively to
improve its manufacturing fixed cost base; optimising efficiency
and balancing its global footprint by moving capacity from Europe
and the US to India and China. These initiatives are expected to
deliver in excess of GBP50m of annual pre-tax cash savings by the
end of 2022 In addition, the Power Systems business is also
implementing a series of measures intended to reduce indirect costs
through process improvements and headcount reduction.
Driving growth and maximising value from our existing
capabilities
In light of the effects of the COVID-19 pandemic, we are
implementing a shift in our medium-term strategy, pursuing stronger
medium-term growth opportunities. In our Civil Aerospace business,
our priority is to drive higher cash returns from our existing
installed base while seeking new approaches to reduce the
investment requirements for the development of our next generation
gas turbine technology. We are also placing a greater relative
focus on investment opportunities in our Defence and Power Systems
businesses.
Enhancing value in our Civil Aerospace business: there is
significant value embedded in our existing installed base of
approximately 5,000 large engines and 9,000 small and business
aviation engines. The investment required to develop the programmes
within this installed base is largely complete and the Group now
has an important opportunity to realise that value. The Group's
fleets are among the youngest in their respective markets,
providing protection from the risk of premature aircraft
retirements and driving higher utilisation than for older fleets.
As investment in new product introductions continues to reduce in
the coming years, we will focus on driving value through a number
of initiatives, including enhanced time-on-wing, enhanced services
offerings and improved engineering efficiency.
We are looking at new ways of working in order to deliver more
compelling returns for Shareholders. For example, we are actively
exploring new forms of industrial partnership on the UltraFan
programme to optimise investment returns and risk (which we
consider important to our continued investment in the UltraFan
programme), in addition to a re-phasing of our investment to adapt
to the likely delay in entry into service of new UltraFan-powered
aircraft. More broadly, we have explored new and different forms of
partnerships and collaborations with industry participants in
respect of our wider Civil Aerospace business. We intend to
continue exploring these to deliver a new approach to
investment.
Significant medium-term opportunities in our Defence business:
we have invested significantly in recent years in pursuing growth
opportunities in the defence market, including in two major
opportunities in the US market, being the B-52 re-engine programme
(where we have submitted our proposal) and the future vertical lift
programme, which we believe have the potential for over 650 engines
and over 4,000 engines respectively, with a combined estimated
lifetime value of approximately GBP7bn. We believe we are well
positioned in respect of these opportunities, which will be
important to the Defence business's future growth.
Delivering growth in our Power Systems business: following the
COVID-19 pandemic, many of the end markets of our Power Systems
business are expected to recover quickly, with some even seeing
accelerated growth opportunities. As a result, we are increasing
the proportional allocation of investment to the Power Systems
business. Investment will also continue in new technologies such as
hybrid systems, as outlined in further detail below. We see key
opportunities in:
-- the Chinese market, where our strategy has already begun to
deliver results, with growth of approximately 40% in underlying
revenue from China in our Power Systems business in 2019 and
expected further growth of 25% in 2020;
-- the mission critical back-up power market, where we expect to
deliver significant growth in the medium to long term;
-- our recently expanded gas portfolio, with strong growth
underpinned by a rising focus on carbon emissions;
-- our Power Systems business aftermarket offering, which has
historically been a more reactive, spare parts sales focused
business, but has the potential to provide a broader range of
services and support; and
-- our integrated power systems solutions, with our focus
shifting towards important developing technologies, including
hybrid, hydrogen and electric power solutions.
We expect this revised approach to capital allocation to result
in an overall reduction in R&D and capital expenditure from
GBP1.9bn in 2019 to approximately GBP1.5bn in 2022. In the medium
term, this investment strategy is expected to result in around 20%
of capital and engineering expenditure directed towards our Power
Systems business (compared to around 14% in 2017 to 2019), with
around 20% focused on our Defence business (compared to around 9%
in 2017 to 2019).
Positioning to benefit from new technologies, with a focus on
sustainable power
We believe that the breadth of our engineering expertise and our
established access to a range of end markets mean that we are well
positioned to play a crucial role in the world's transition to a
net-zero carbon economy. Once we achieve our aim of restoring
financial returns and a more appropriate balance sheet, we intend
to accelerate this aspect of our strategy to deliver substantial
growth by 2025. In line with this strategy, we are building the
capability to produce world-class, modular and scalable electric
power and propulsion systems.
Due to the space and weight constraints of airborne
applications, we are focusing our electrical efforts on smaller,
sub-megawatt applications with faster routes to revenue, which will
create new, disruptive business opportunities. For example, we have
conducted a successful ground test of a hybrid M250 engine for the
electric vertical take-off and landing ("EVTOL") market and have
developed an all-electric aircraft through the ACCEL programme
which is designed to break the world electric air speed record.
Simultaneously, we are working to enhance our megawatt scale
capability, with a short-term focus on land and sea applications
where markets are already electrifying. Our Power Systems business
is already generating revenue in this area, with substantial growth
expected by 2025. Through our Power Systems business, we were
first-to-market with a hybrid system for the rail sector, are
developing the first hybrid system in the yacht market and have
developed a proven microgrid product offering. Longer term, we
intend to leverage the expertise gained through these megawatt
scale land and sea applications, and the domain expertise gained
through certifying sub-megawatt scale airborne systems, in order to
ready the technologies for the eventual electrification of larger
regional aircraft in the 2030s.
For aircraft larger than regional jets, weight constraints pose
a significant challenge to electrification. As a result, in
addition to the electric power solutions described above, we are
using our expertise in aviation to work with governments and
industrial partners to explore the development of sustainable
aviation fuels. Sustainable fuels offer a viable path to low
carbon, long-haul travel and can be used with our existing gas
turbine architecture. As the cost of sustainable fuels is expected
to be higher than existing kerosene-based fuel, an efficient gas
turbine architecture, such as our UltraFan programme, is expected
to be critical to our airline customers in the future.
We are also exploring commercial applications for the production
of low carbon power through development of small modular reactors
("SMRs"), which leverage our nuclear skills and knowledge from
submarine applications. In 2019, we received initial match funding
from the UK Government to progress this new type of compact smart
nuclear power station. We believe that our expertise puts us in a
favourable position in the SMR market.
FINANCIAL OUTLOOK
As outlined above, the COVID-19 pandemic has had, and continues
to have, a significant effect on our business. Despite rapid
actions to conserve cash, the impact of COVID-19 on EFHs and other
aftermarket activity in the Civil Aerospace business, the decision
to cease invoice discounting (GBP1.1bn at FY19), and a large
working capital outflow due to lower activity levels together means
that we anticipate a free cash outflow during 2020 of approximately
GBP4bn (with underlying revenue of approximately 25-30% lower than
2019). The majority of this impact occurred in the first half of
2020, with a free cash outflow of GBP2.8bn. A reduced free cash
outflow of approximately GBP1bn is expected in the second half of
2020, including as a result of a modest recovery in EFHs expected
in the fourth quarter of 2020. In 2021 we expect a significantly
reduced free cash outflow relative to 2020, as EFHs continue to
recover and savings from our restructuring programme are realised,
with positive cash flows targeted during the second half of
2021.
Over the long term we believe that the key markets for our
businesses remain fundamentally attractive. In the Civil Aerospace
business we expect aftermarket activity to gradually recover, with
large engine EFHs reaching 2019 levels by 2024-2025, though
remaining below the pre-COVID-19 pandemic trajectory. New widebody
engine deliveries are expected to remain lower at around 250 per
year in 2020-2022, but still to exceed retirements of 100 to 150
per year during the same period (excluding the one-off impact of
retirements in 2020, particularly on older Trent 900 and Trent 500
fleets). In a "reasonable worst case" scenario we expect
approximately 130 widebody engine deliveries in 2022. The widebody
engine delivery outlook also drives a large portion of the ITP Aero
business's expected demand, though we expect some growth in its
non-widebody activities in narrowbody and business aviation. In the
Power Systems business we anticipate a recovery in most key end
markets by 2021, with particularly strong growth in mission
critical power generation, and strong regional growth from China.
The key markets for our Defence business, the US and UK, are
expected to remain resilient.
Supported by this recovery of our end markets, as well as the
decisive actions we have taken to significantly restructure the
Group's cost base, we are targeting a return to annual FCF of at
least GBP750m (excluding disposals) as early as 2022. This expected
improvement of approximately GBP4.75bn in FCF performance from 2020
to 2022 (excluding disposals) is expected to be driven by four main
factors:
-- No repetition of one-off working capital outflows: comprising
the approximately GBP1.1bn of one-off cessation of
invoice-factoring and approximately GBP1bn expected working capital
movement driven by lower activity levels described above.
-- Recovery in our Civil Aerospace business: we expect widebody
EFHs to decline by approximately 55% in 2020 compared to 2019,
recovering to approximately 70% of 2019 levels in 2021 and
approximately 90% of 2019 levels by 2022, before returning to
GDP-driven growth. This anticipated recovery to approximately 90%
of 2019 levels in 2022 is expected to drive more than GBP1.5bn of
additional cash receipts (as compared to 2020), with further growth
expected thereafter. Additionally, an FCF improvement of over
GBP300m is expected to be driven predominantly by improved time and
materials revenues and lower widebody OE losses. We also expect an
ongoing reduction of Trent 1000 in-service costs of approximately
GBP200m to GBP300m. In a "reasonable worst case" scenario, we
expect widebody EFHs to recover to approximately 80% of 2019 levels
by 2022.
-- Operating cost reduction: the Group's restructuring is
expected to deliver Group-wide pre-tax cash savings of at least
GBP1.3bn per annum by the end of 2022 (including remaining savings
of approximately GBP100m from the restructuring programme announced
in 2018). This will replace and expand the expected GBP1bn of
temporary cost saving measures implemented by the Group during
2020. The reorganisation is focused on reducing the fixed cost
footprint in the Civil Aerospace business, with a significant
reduction in headcount and facility footprint to match the new
demand outlook. This lower fixed cost base supports a continued
reduction in the average losses on widebody OE engines.
-- Power Systems business recovery and Defence business
resilience: improved performance in the Power Systems business and
continued resilience in the Defence business, along with receipts
from the ITP Aero business, is expected to drive approximately
GBP200m of additional FCF compared to 2020. We expect this
improvement in the Power Systems business to be driven by a
cyclical recovery in key end markets as well as the Group's
continued strategy to boost growth through a focus on power
generation systems, aftermarket growth, and market-share gains in
China.
The targeted return of FCF of at least GBP750m (excluding
disposals) as early as 2022 includes the expected impact of
temporary outflows in that year, including approximately GBP300m of
foreign exchange cash costs relating to our decision to reduce the
size of the Group's hedge book.
Having restored financial performance as early as 2022, we
believe that thereafter the Group has an attractive medium-term
outlook. We expect our target FCF of at least GBP750m (excluding
disposals) described above to continue to grow in the future, as
the temporary negative outflows relating to the reduction in the
Group's hedge book and ongoing Trent 1000 costs unwind over time.
This expected FCF growth after 2022 is expected to lead to
continued deleveraging. In addition, our underlying businesses are
expected to deliver growth. The Civil Aerospace business is
expected to return to a growing installed base and we expect to
deliver additional growth in FCF as we improve cash returns from
the current installed base. Our Defence business is expected to
continue delivering resilient performance, with important growth
opportunities over time as major projects are awarded. The Power
Systems business is expected to return to 2019 underlying revenue
levels by 2022 and to deliver growth in excess of GDP given the
tailwinds the business benefits from, including low carbon
opportunities over time.
PRINCIPAL TERMS OF THE RIGHTS ISSUE
Overview
We are proposing to raise aggregate gross proceeds of
approximately GBP2bn from the Rights Issue.
Pricing
The Rights Issue Price represents a 75.4% discount to the
Closing Price of 130 pence per Existing Ordinary Share on 30
September 2020 and a 41.4% discount to the theoretical ex-rights
price of 54.6 pence per Existing Ordinary Share based on that same
Closing Price.
The Rights Issue Price has been set, following discussions with
major Shareholders, at the level which the Board considers
necessary to ensure the success of the Rights Issue, taking into
account the aggregate proceeds to be raised. The Board believes
that the Rights Issue Price, and the discount which it represents,
is appropriate.
Dilution
The Rights Issue will result in up to 6,436,651,043 New Ordinary
Shares being issued and the number of Ordinary Shares being
increased from a total of 1,930,995,313 Ordinary Shares to a total
of up to 8,367,646,356 Ordinary Shares, representing an increase of
approximately 333%, assuming no Ordinary Shares are issued due to
the vesting or exercise of any awards under the Share Plans or
otherwise between the Latest Practicable Date and the completion of
the Rights Issue.
If a Qualifying Shareholder does not (or is not permitted to)
take up any New Ordinary Shares under the Rights Issue, such
Shareholder's proportionate ownership and voting interests in the
Company will be diluted by approximately 76.92% as a result of the
Rights Issue, assuming that no Ordinary Shares are issued due to
the vesting or exercise of any awards under the Share Plans or
otherwise between the Latest Practicable Date and the completion of
the Rights Issue.
Key terms
On and subject to, among other things, the terms and conditions
described in Part VII (Terms and Conditions of the Rights Issue) of
the Prospectus, up to 6,436,651,043 New Ordinary Shares will be
offered by way of rights at the Rights Issue Price of 32 pence per
New Ordinary Share to Qualifying Shareholders on the basis of:
10 New Ordinary Shares for every 3 Existing Ordinary Shares
held and registered in their name on the Record Date (and so in
proportion for the number of Existing Ordinary Shares then held,
subject to fractional entitlements).
Qualifying Non-CREST Shareholders with registered addresses in
the United States or in any of the
other Excluded Territories will not be sent Provisional
Allotment Letters and will not have their CREST stock accounts
credited with Nil Paid Rights, except where the Company and the
Underwriters are satisfied that such action would not result in the
contravention of any registration or other legal or regulatory
requirement in such jurisdiction.
Entitlements to New Ordinary Shares under the Rights Issue will
be rounded down to the nearest whole number and fractions of New
Ordinary Shares will not be provisionally allotted to Qualifying
Shareholders. Holdings of Existing Ordinary Shares in certificated
and uncertificated form will be
treated as separate holdings for the purpose of calculating
entitlements under the Rights Issue.
The Rights Issue has been fully underwritten by the Underwriters
in accordance with the terms and subject to the conditions of the
Underwriting Agreement, details of which are set out in section 9.1
(Underwriting Agreement) of Part XII (Additional Information) of
the Prospectus.
The Rights Issue is conditional upon (among other things): (i)
the passing of the Ordinary Resolution at the General Meeting
without material amendment; (ii) the Underwriting Agreement having
become unconditional in all respects (save for the condition
relating to Admission of Nil Paid Rights); and (iii) Admission of
Nil Paid Rights becoming effective by not later than 8.00 a.m. on
28 October 2020 (or such later date as the Company and the
Underwriters may agree).
Application will be made to the FCA for the New Ordinary Shares
(nil and fully paid) to be admitted to listing on the premium
listing segment of the Official List and to the London Stock
Exchange for the New Ordinary Shares (nil and fully paid) to be
admitted to trading on its main market for listed securities. It is
expected that Admission of Nil Paid Rights will become effective,
and that dealings in the New Ordinary Shares, nil paid, on the
London Stock Exchange's main market for listed securities will
commence, at 8:00 a.m. on 28 October 2020. It is also expected that
Admission of the New Ordinary Shares (fully paid) will become
effective, and dealings in New Ordinary Shares, fully paid, on the
London Stock Exchange's main market for listed securities will
commence, at 8:00 a.m. on 12 November 2020.
The New Ordinary Shares will, when issued and fully paid, rank
pari passu in all respects with, and will carry the same voting and
dividend rights as, the Existing Ordinary Shares.
Overseas Shareholders, including Shareholders resident in the
United States, as well as holders of ADRs, should refer to section
7 (Overseas Shareholders) of Part VII (Terms and Conditions of the
Rights Issue) of the Prospectus for further information regarding
their ability to participate in the Rights Issue.
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END
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October 01, 2020 02:00 ET (06:00 GMT)
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